Will TTIP Harm the Global Trading System?

The European Union’s member states form the world’s largest economy followed by the United States. So, the rest of the world is wary about ongoing negotiations for a Transatlantic Trade and Investment Partnership, or TTIP. Other trading partners of the US and the EU may have to meet new regulations without having a voice in their making. Or in other areas, the partners may have to deal with two sets of regulations while the US and the EU agree to accept their own differences. The US and the EU could ease worries among their major trade partners, including China, by consulting on the proposed revisions. “TTIP is the result of the WTO’s troubles, not the cause of it,” as the organization fails to reform or secure global agreement among 159 members, argue Katinka Barysch and Michael Heise. “A well-functioning global trade body should be everyone’s first choice. But the WTO’s problems run deep; they have to do with new technology that is changing the nature of international commerce and with the rise of new economic powers.” – YaleGlobal

Will TTIP Harm the Global Trading System?

Global trade regulations have not kept up with business trends – TTIP could jump-start reform

Katinka Barysch, Michael Heise

YaleGlobal, 9 January 2014

Trade dance: Transatlantic Trade and Investment Partnership would link the EU and the US, world's largest economies, as described by Ignacio Garcia Bercero, top left, and Dan Mullaney; China and other emerging economies don't want to miss the party

MUNICH: The United States and the European Union are about to start the third round of negotiations for a Transatlantic Trade and Investment Partnership, or TTIP. Such an agreement has the potential to forge a transatlantic marketplace for 800 million of the world’s richest consumers. This would make it easier for business to sell and invest across the Atlantic. But many fear that the agreement does not bode well for World Trade Organization that has sought to provide a framework for multilateral trade for almost 70 years and often helped poorer nations to get the same treatment as the rich.

Some European politicians wanted to put TTIP talks on hold until disagreements over NSA surveillance of Europeans have been cleared. But for now it looks unlikely that data security issues will derail the TTIP talks. Both the EU and the US governments are pushing for an early deal, and businesses on both sides are mostly in favor. But not everyone likes the idea of TTIP. Europe’s and America’s other trading partners – including China, Turkey and Mexico – are seriously worried that improved transatlantic ties could come at their expense.

Many people claim that TTIP is not really about economic gains but about geopolitics. Faced with the rise of emerging markets, the old West is pulling together one more time. Critics claim this is a vain attempt to defend the West’s economic leadership. China is particularly worried that it’s the target of TTIP, not least because the United States is simultaneously negotiating the Trans-Pacific Partnership agreement with some of China’s neighbors, including Japan.

True, TTIP has a political component. Many free trade agreements do – most notably the European Union itself, which integrated the markets of former adversaries in order to make them friends. But that does not mean that TTIP lacks an economic rationale.

Many claim that TTIP is more about geopolitics than economic gains… the old West pulling together once more.

First, TTIP is the result of the WTO’s troubles, not the cause of it. The latest round of multilateral trade talks, the Doha round, dragged on for 12 years, before member countries agreed on at least some of the issues under discussion in December 2013. But the Bali agreement fell short of original ambitions, and the WTO is still playing catch-up. Today, international trade is at least as much about rules and regulations as it is about tariffs. The WTO has not significantly updated its rulebook since 1994. But business has moved on. The idea from the US and the EU to work together to overcome global gridlock is legitimate.

Second, in many areas, regulations and processes on both sides of the Atlantic have been drifting apart for years, and even more so since the start of the financial crisis in 2007. The two sides owe it to their business communities and consumers to try and narrow the regulatory gap. Bilateral talks are probably better suited for this than involving the other 130 WTO members.

If TTIP turned out to be a broad and deep agreement, the US and the EU could look forward to significant economic gains. These are less likely to come from the one-off removal of remaining tariffs and protectionist red-tape, but from the permanent increase in competition, which in turn could fuel innovation and productivity, leading to better-paid jobs. More growth in the world’s two biggest economic areas would also mean more business for the other countries that trade with them. How much more is almost impossible to say. Since TTIP would be more about regulatory changes than tariffs, traditional calculations of how much new trade might be created and how much might be diverted from third countries cannot be applied easily.

Nevertheless, the regulatory nature of TTIP does pose particular challenges to the trading partners of the US and the EU.

The two sides of the Atlantic owe it to business communities and consumers to narrow the regulatory gap.

First, if the US and the EU agree on new transatlantic standards, say, for cars, beef or medicine, all their other trading partners would have to comply with these – but without having had a say in their making.

Second, in many areas the EU and the US will not harmonize their rules but simply accept each other’s standards and processes as safe – a procedure called mutual recognition. Producers in Europe would then have to comply with only the EU standards, and they could also sell in the US, and vice versa. Third countries, however, might still have to meet two sets of standards, one for the EU and one for the US market. The extra effort could put them at a competitive disadvantage vis-à-vis American and European companies.

Third, TTIP is explicitly aimed at setting 21st century rules for issues that matter for global commerce today, but are not being dealt with anywhere. Some of these rules would affect emerging markets more than the US and the EU, for example how to treat state-owned enterprises, labor laws and energy subsidies in international trade.

The EU and the US should take such concerns seriously. There are ways in which they can make the TTIP talks less worrisome for their trading partners. For example, countries with which the US and the EU already have deep integration – including Mexico, Norway or Turkey – could at least be consulted in the rulemaking exercise. In areas where Brussels and Washington agree on mutual recognition, they could offer their trading partners to comply with either the European or the American standards, presumably whichever is lower, and then allow them to sell into the entire transatlantic marketplace. This would be a clear improvement over the current state of affairs. Finally, 21st century rules would only gain global traction if they enjoy a modicum of support and legitimacy among emerging markets.

If the US and EU agree on new standards, other trade partners must comply on those without having a say.

The EU and the US can also try to make TTIP as WTO-compatible as possible. For example, the two could keep TTIP open for other countries to join later – and again, the most immediate candidates are countries with which the US and the EU already have functioning free trade deals such as Canada or Switzerland. The EU and the US could use the WTO’s well-established dispute settlement mechanism in their bilateral dealings as much as possible.

In parallel to TTIP, the US and the EU should support an ambitious reform of the WTO itself. Such reforms could include extending the WTO’s mandate to deal with 21st century issues and abolishing the overly rigid rule that all 159 WTO members need to agree on each and every trade deal. The partial Bali deal has shown that, in practice, this rule already plays a diminished role.

What the US and the EU should not do is pass up the opportunity to free up trade between the world’s two largest trade partners because the WTO is slow-moving and out of date. A well-functioning global trade body should be everyone’s first choice. But the WTO’s problems run deep; they have to do with new technology that is changing the nature of international commerce and with the rise of new economic powers. The WTO is by no means the only multilateral body that is in trouble: Consider the United Nations Security Council, the G20 or global climate talks. But TTIP could be a giant wakeup call for a trade organization that has been drifting towards irrelevance.

Katinka Barysch is director of political relations and Michael Heise is chief economist at Allianz SE. They express their personal views in this article.